The Economy Is A Flesh-Eating Spider With Wings – Special Offer, One Week Only!
“All models are wrong, but some are useful.”
George E. P. Box
Scotty Morrison’s recent analogy got me thinking about analogies.
I mean, for years we’ve been told that running the government is like running a household. You can’t keep putting things on the credit card, because you’re paying excessively high rates of interest, so that means you should never borrow anything and pay cash for your house. Or something like that. Mind you, governments borrow at much lower rates of interest, the ever-mentioned credit card is itself an analogy!
Well, after years of trying to get my head around which household has several million unrelated people in it, plus companies that come in, use our stuff and then leave without offering anything in return, I discover that there’s more to government than just staying at home doing nothing.
Government – according to our Treasurer – is also like a drive with the family. The driver doesn’t want anyone asking annoying questions like “Where are we going?” or “How will we get there?” or “How did Tony get out of the boot and what’s he doing on the bonnet of the car?”
Analogies are good for explaining things, but they break down if you try to examine them in more detail. As I said to my wife, “Think of me like Brad Pitt.” Of course, when she asked why, I explained that I was taking a leaf out of the Liberals book and just using an analogy, but she insisted on pointing out that Brad Pitt was good looking and wealthy at which point the analogy broke down as did I.
So, if the Liberals want to use an analogy that’s fine, but it’s no substitute for an actual explanation. If I want to suggest that you think of the economy as giant flesh-eating spider with wings, then I’ll probably be asked in what way. When I suggest that it’s scary and we don’t want it to get out of control, then the analogy still makes sense. Even suggesting clipping its wings can make sense, if I’m talking about unrestrained growth.
However, when I make the mistake of thinking of the economy as an actual giant spider and don’t move back into the real world, then I can hardly be surprised if people with arachnophobia refuse to participate in the workforce. Similarly, I shouldn’t keep talking about spiders and at some point, I have to explain how this translates into the real world.
To return to the Liberal idea of the household budget, it’s one of those things that sounds good, but bears about as much relationship to an actual economic policy as my mythical eight-legged creature. Even in terms of their own analogy, there are times when a household should go into debt. Gaining qualifications that enable one to get a well-paying job is an obvious example. Buying the house may be another. And, if the Liberals get it through the Senate, paying for one’s pathology bills.
But the one thing that they constantly ignore in their use of the idea of “living within your means” is that all government expenditure leads to some return in the form of revenue for the government. It may not cover it all straight away, but if you create opportunities for people to work or train, it eventually adds to the tax base. Similarly, if you cut these opportunities then eventually you restrict your revenue in the future.
Think of it like a car, you need to put a certain amount of petrol in, or you won’t make it to the next petrol station, so it’s not a matter of saying petrol’s too expensive this year unless you plan to stop driving altogether and become one of Joe’s poor people. (There’s one that’s almost simple enough for the Liberals.)
(Relax! Competition will mean that pathology companies don’t put their prices up and adding 5% to the GST won’t lead to higher prices either and Santa will bring all the presents this year, so you needn’t buy any!)
For a party that’s slashing so much out of the Arts, they seem great at using metaphors and analogies instead of actually talking about policies. And when you add in all that fiction about what good economic managers they are, it’s a wonder that they don’t see the value of the Arts.
Just in case you haven’t noticed what the Liberals have done to the Arts because you’ve been distracted by what they’re doing with bulk-billing, I’ve included this short video from the Arts Party.
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13 comments
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Carol Taylor -
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Sen Nearly Ile
Return to home pageOf interest is a statement in this morning’s Age that, “Australia’s largest Biotech company, CSL, which recently announced it was expanding in Switzerland because Australia’s 30 per cent corporate tax rate is too high, had $2.1 billion turnover and paid no tax”.
Am I missing something? CSL is expanding to Switzerland because Australia’s tax is too high, but they paid none anyway…
They no doubt want a refund for their ingenuity in tax avoidance – after all, we gave Rupert an $882 million refund for creative accounting.
The fallacy in attempting to make an analogy between household debt and government debt runs much deeper than you have indicated Rossleigh. For several decades now, currency-issuing countries around the world have been operating without a gold standard to back their respective currencies. Modern currencies are based on pure state fiat money, backed only by the ability and willingness of central governments to tax their citizens. Unfortunately many mainstream economists have not yet caught up with the implications of this relatively new situation, and consequently they do not understand the development of modern monetary theory (MMT) and what it is all about. Among other things, MMT proposes that monetarily sovereign governments (this includes our federal government but not our state or municipal governments) no longer need to rely on taxation revenue in order to spend into the economy without needing to worry about inflationary pressure or a rise in interest rates.
Deficit spending, whether accommodated by issuing Treasury bonds to the private sector or more directly to the central bank, allows the central government to inject new net financial assets into the private sector, as deemed appropriate for the purpose of enhancing aggregate demand, boosting the ability of the private sector to save and spend, and reducing the overall level of unemployment. Only the central government has the ability to create net financial assets in this way; it never needs to “balance” its budget, and can never go broke. Putting it another way, it always lives within its means, because it has a bottomless pit of financial assets (denominated in dollars, and if necessary easily converted into actual dollars) at its disposal. There is no risk of inflationary pressure from deficit spending in circumstances where the economy is operating below its capacity to produce goods and services (such as right now!). None of this applies to a household, or to household budgeting.
Very few pay that 30% they keep screaming about.
Rossleigh, are you sure it is not a giant bloodsucking vampire squid, instead?
The civil societies of the West may well experience the consequences of losing the post WW2 class war, but if so, are we not in good company, as history is littered with the dried out husks of civilisations who forgot their own origins and in their laziness got rolled by sneaky newcomers arriving, concealed within the gift of some Trojan Horse.
But worry not..if so, it will matter very little to History, we know from Star Wars that the Cosmic Attention is already focussed toward a faraway Galaxy, once upon a time and events of vastly more epic consequence than meet our philosophy.
The LNP used to say that responsible electors want a resilient economy. More correctly the LNP wants a political zoo where constituents compete to be more predictable like those flesh-eating spiders. Thanks for your thoughts, Rossleigh.
Thanks for the laughs Rossleigh….but where is the ‘Arts Party’ video ? I’m sure they have important things to say……
Enbryonic Arts party? Here is a Razer-sharp link:http://dailyreview.com.au/new-screen-australia-budget-cuts-how-the-governments-deal-with-hollywood-treated-us-like-mugs/34823#.VnDsG6_t8nE.facebook
I updated Adobe Flash Player to gain access to the video.
oh gawd updating Adobe again…no ? It reckons it is up to date…must be something I have blocking it maybe….
Just in case it’s missing…
I will add to John Hermann’s important post from the point of view of MMT. However, many people find it hard to accept the MMT approach without considerable study and thought. They then postpone consideration of what he has posted until further notice.
Before anyone can get to grips with MMT one needs to understand the basics of macro-economic national accounting. This only requires a simple understanding of accounting arithmetic and is quite independent of MMT or anything else.
It follows from the national accounting identity, that the total income of the private domestic sector minus its expenditure is equal to the government expenditure minus taxes (the budget “deficit”) + the external trade surplus. This implies that if we have an external trade deficit, and a “surplus” budget, then the private domestic sector MUST incur debt (it cannot save).
This explains how the rare “budget surpluses” of Peter Costello were achieved on the back of rocketing private sector debt – nothing to do with “better economic management”. Now that private sector debt is around 125% of GDP, we need to bring this down and the last thing we should be looking for is a budget surplus, unless we can rack up a substantial trade surplus, like Norway.
On the other hand, Govt. debt is around 25% of GDP, and as explained by John Hermann, there can be no default on this, so it is not a matter of concern at all. Indeed Japanese government debt is around 200% of GDP and the sky has not fallen in on Japan.
The idea that the (Australian Federal) government is like a household is completely wrong, but sadly it seems that most people are sucked in by this false analogy, including most of our politicians.
Swan could have thrown the rabbott’s debt crisis back at him by linking his debt to salary.
The rabbott’s mortgage on his new house was $450000 and his salary $150000 this is a debt of 300% When he became leader his salary and allowances reached $250000 that is a debt of 200%. Neither of these is a crisis. Labor’s debt was 25%, The septic and the poms were 100% and japan was 200% the rabbott was calling these countries catastrophic. the media would have loved it.
Unfortunately the household analogy works because everybody knows that too much debt means loss of the house.
The mortgage explanation has % so it and the truth is too difficult to understand rendering it ineffective.
Sadly three word slogans, fixed repetition of answers and simple lies rule.